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Why It's a Bad Idea to Mingle Small-Business and Personal Banking

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Entrepreneurs starting a business face many decisions about how to best set up and operationalize their company, including whether to register a business; where to set up space; and how to manage finances. For some, especially those operating as sole proprietors, it may seem easiest to use a checking account that's already set up to manage finances, usually a personal checking account. In fact, according to a 2015 TD Bank survey of small business owners, 56 percent use a checking account for both business and personal finances, and 53 percent use a credit card similarly. Although comingling finances is a common practice, doing so could have consequences for a small business owner.

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Using the same account understandably seems easy. It can save the time needed to find the correct paperwork and identification and a trip to the bank to open an account. Small business owners, especially those starting out, watch their spending and typically want to invest their hard-earned money into the business. That is why some opt to use a personal checking account for business purposes. Personal checking accounts typically have lower minimum balance requirements to avoid fees, but working with your bank usually can offer benefits such as relationship discounts or the ability to link accounts and combine funds to meet minimum balance requirements.

Related: How the Decline in Community Banks Hurts Small Business

Business checking accounts offer another advantage for business owners: The capability to connect payment services and often receive relationship discounts on these services. Unlike a personal checking account, business accounts offer owners the flexibility to accept credit and debit card payments along with cash and checks, providing additional convenience to customers and the owner. This also makes it easy to see expenses and income, thus simplifying the bookkeeping process.

Small business owners who mix personal and business finances within one account may have difficulty getting an accurate view of cash flow and producing income statements needed to obtain financing. Setting up separate accounts pays off at tax time as well.

Related: Voices That Matter: Business Lessons From a Top Banker

"It's easy to file business income on a personal tax return, but it's not a best practice," said Andrew Laufer, CPA, partner at Landau Arnold Laufer in Babylon, New York. "You can miss deductions and increase your audit risk because income or expenses are often misreported."

Business owners incur several expenses that could be written off, such as business startup expenses, business travel costs and other expenses used for research or establishing relationships with vendors, noted Laufer. If these are paid through a personal account, the business owner must keep a diligent log of these occurrences and receipts if applicable. Similar rules apply when using a personal credit card for business purchases. By having a business entity and business credit card right from the start, these types of expenses are much easier to track.

Also consider your future financing needs when deciding how to best manage your business' finances. Signing up for a business credit card will streamline the record-keeping process while helping your business establish a credit history and profile. This is important as the business grows and has financial needs such as a business mortgage, line of credit or loan. Businesses that have a separate credit profile will not have to solely rely on the owner's personal history when obtaining financing, giving a stronger credit picture and increasing your chances of approval by an institution.

Separating finances is a liability issue as well. Mitigating this liability starts with setting up the right legal entity for the business.

"Establishing a business structure such as an LLC or S-Corporation will provide significant protection to owners and their personal assets in the event of business negligence or fraud," Laufer said. "If you don't have this structure, you can be sued as an individual and your personal finances are on the line. Setting up the right legal structure also lowers your audit risk."

Creating the right accounts and structure for your business from the outset can help prevent future financial missteps or headaches, and enlisting a professional doesn't need to be costly. Starting with your banker is free, and he or she can provide feedback on business plans and make referrals to other trusted advisors, like an attorney or accountant.

"As you're going into business on your own, build a major-league team that sets you up for success," Laufer said. "You can start with a dream, but structure allows you to grow that dream."

Related: Time for a Bank Loan? What Lenders Are Looking For in Small-Business Owners.

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